Russia cooks its defense books

Reports that Russia is limiting military spending to a 1 percent (nominal) increase in 2016 may be timed to deflate NATO’s initiative to raise defense spending to the target 2 percent for each member country. Russia is playing a dual role. On the one hand, it exults in its military power on prominent display in Syria. On the other, it plays the role of impoverished cousin — too poor to keep up military spending. Russia cannot have it both ways.

As reported by Russian official news sources and other media (Moscow Times, Defense News), the Russian Federation’s 2016 draft budget calls for a miniscule (less than 1 percent) increase in defense spending. According to the draft budget, 2016 spending on national defense and national security will be around $50 billion (at current depressed exchange rates), or some 4 percent of GDP and only eight-tenths of 1 percent higher than 2015. With a projected 7 percent inflation rate, these figures call for a substantial decline in real military spending.

These static figures seem counterintuitive in the face of Russia’s military engagement in Syria and east Ukraine and its military exercises on its western borders and the Arctic. According to the official numbers, Russia is either a paper tiger or getting huge efficiencies from its military spending.

Closer examination shows that Russia is reprising Soviet times, when official USSR defense budget figures had little meaning and actual defense outlays had to be calculated independently and with large margins of error.

A mainstream Russia newspaper, Vedemosti, in its story Russia Hides its Budget, reports that a quarter of federal spending is now classified as secret. Disclosure of information on defense spending has become a criminal act under the state secrets law. What is secret and what is not appears to be quite arbitrary. What we do know is that the scrawny defense expenditure figures cited above capture only the non-classified portion of defense outlays. The “secret” part of the defense budget is rising as a share of the total, which means that the official figures understate the rise and share of military spending.

Two independent Russian sources offer estimates of Russian defense spending that purport to adjust for secret spending. The Institute for the Reformation of Societal Finances incorporates the value of the 2016-2020 $400 billion State Program for the Development of the Defense-Industrial Complex as part of the secret share of the budget. According to the institute’s calculations, the 2016 share of defense outlays will be one-third of the 2016 federal budget and slightly above 6 percent of GDP versus the official figures of 20 percent and 4 percent of GDP.

The Center of Development of the Higher School of Economics gets the same results (one-third of federal spending and 6 percent of GDP) using a different methodology. The Center for Development calculates the national defense and national security share of the budget by filling in the “secret” holes. This is no easy task because the budget is divided into almost 10,000 budget positions.

The Center finds that 60 percent of defense spending is for national defense and the rest is for national security. A peculiar feature of Russian security spending is the federalization of security such as a large ministry of interior and FSB (federal security service) troop force, and a multitude of federal law enforcement agencies. If we drop the federal prison system and fire protection services (on the grounds that they do not belong in national security), the defense share of the federal budget falls to 31.5 percent, which is still above 6 percent of GDP.

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The possible privatization of defense spending introduces yet another complication to estimating defense outlays. A prominent Russian oligarch is rumored to have been the bankroller of the separatist insurgency in east Ukraine. Putin is known to have taxed various oligarchs to pay for the Sochi Olympics. If Olympics, why not military spending?

Russian GDP measures approximately $2 trillion (in purchasing power parity) of which they spend (according to the figures in this piece) 6 percent or $120 billion on defense. The GDP of NATO’s continental European members adds up to some $18 trillion, of which they collectively spend slightly over 1.2 percent for a total of $230 billion on defense. If the continental NATO countries raised their military spending to the 2 percent target, they would add another $200 billion to defense spending without even counting the United States and the U.K. At the 2 percent target, NATO would spend some $430 billion on defense versus Russia’s $120 billion.

As during the Cold War, the USSR strained to compete militarily with the West because of its relatively small GDP. Now we have Putin’s Russia engaged in a struggle with the West, operating with a similar small GDP problem. The prospect of NATO meeting its 2 percent target places Russia at a similar disadvantage as the USSR encountered trying to compete with Reagan’s Star Wars program.

The Russian announcement of a modest defense budget may be Russia’s way of signaling to NATO that the sacrifice of extra defense spending during a time of economic woe is not necessary. Why should they ramp up defense spending when their foe is cutting back? I suspect this is the Kremlin’s line.

Paul R. Gregory is a research fellow at the Hoover Institution. He holds an endowed professorship in the Department of Economics at the University of Houston, Texas, is a research professor at the German Institute for Economic Research in Berlin, and is emeritus chair of the International Advisory Board of the Kiev School of Economics.

Stavros H

I totally agree that the Russians are hiding a massive part of their military outlays (for very good reasons) This money was secretly hoarded during the period of extremely high oil prices and was not included in any of Russia’s 3 reserve funds (the smart thing to do) This also explains why Russia has relatively poor GDP growth during the period between 2012-14, and also explains how they can wage campaigns in Ukraine, Syria, produce new weapons systems and frustrate NATO at every turn.